Jefferson County Sewer Receiver Fights for Control of Star-Crossed System

By Margaret Newkirk, David Beasley and Martin Z. Braun -
Nov 18, 2011

Jefferson County, Alabama, and its
creditors meet Nov. 21 for the first fight of the biggest U.S.
municipal bankruptcy -- whether John S. Young Jr., the sewer
system’s court-appointed receiver, should go home to New Jersey.

The Cherry Hill water executive has been running the
utility, with more than $3.1 billion in defaulted debt, since
the end of 2010. He says he’s Birmingham’s least-popular man.

“I’ve been called everything from the devil, which in the
Bible Belt is not a good thing to be called, to a carpetbagger,
to the sheriff of Nottingham,” Young told the American Water
Summit in Atlanta last week, hours before Alabama’s most-
populous county declared bankruptcy. “They refer to me as Tony
Soprano,” television’s Garden State crime boss.

An Alabama judge appointed Young, 58, to raise revenue and
cut costs after a lawsuit by insurers and the bond trustee, Bank
of New York Mellon Corp. (BK) Young said yesterday in a New York
interview that should U.S. Bankruptcy Court Judge Thomas B. Bennett remove him, investors would have weaker protection and
the bond market would be harmed.

Since December, Young has been paid more than $1 million to
be the voice of creditors, including those who enabled the risky
financing that caused the crisis in 2008, county records show.
He has proposed raising sewer rates 25 percent in a place where
he says a fourth of his 126,000 customers are at or below 1.5
times the federal poverty rate.

Demand for Cash

In June, he demanded $75 million from the county: The money
came from a U.S. Securities and Exchange Commission settlement
with JPMorgan Chase & Co. (JPM) tied to an unlawful payment scheme. He
held off while a settlement was under discussion between the
county and banks and insurers.

Young negotiated a deal with creditors, of which JPMorgan
is the largest, that included $1 billion in concessions.
Commissioners said that was $140 million shy of what was
promised and that they couldn’t count on the Alabama Legislature
to deliver its part of the deal.

The county declared bankruptcy Nov. 9.

Local officials call Young highhanded, or worse.

“He’s vindictive and mean-spirited,” state Representative
John Rogers, a Birmingham Democrat, said at a Nov. 14 hearing.

“It’s better for the county for John Young to leave,”
County Commission President David Carrington, a Republican, said
at a public meeting Nov. 15.

With the county in bankruptcy, “there’s no reason to have
the receiver in place,” said state Representative Paul DeMarco,
the Republican head of the delegation. “To spend millions of
dollars for that makes no sense.”

“We came up with a solution that was good for all
parties,” he said. “I was really surprised we couldn’t get it
over the finish line, not only surprised but very
disappointed.”

The county holds that the Chapter 9 filing stops Young’s
authority. Young disputes that. In hearings scheduled Nov. 21
and Nov. 22, Bennett will weigh claims from both sides.

Utility Executive

Young was chief operating officer at American Water Works
Co., a Voorhees, New Jersey, utility with 16 million customers
in 32 U.S. states and Canada, when he got a call from a
Birmingham lawyer asking him to come to Alabama.

In his Atlanta presentation, and one in New York yesterday,
Young said the sewer system was a mess when he arrived.

Saying that New York bankers enabled too much debt and
risky financing, he said corruption among some former
politicians and incompetence were the real culprits. Taking
advantage of a federal order to repair the crumbling system,
county officials went on a spending spree with their friends and
with no budget or plan, Young said.

Five former commissioners were convicted of or pleaded
guilty to corruption charges in connection with the project.

Young showed slides of a $52 million treatment plant sited
so poorly that it filled with groundwater and needed $36 million
to repair, and a “tunnel to nowhere” that stops halfway under
the Cahaba River.

“They had a tendency to just make projects up,” he said.

Fee Increase

Sewer fees rose 329 percent from 1997 to 2008 and haven’t
increased since. With bills mounting, officials “went to the
New York municipal-bond market and said ‘How can you help us get
creative, so that we can spend more money without raising
rates?’”

The system was still mismanaged last year, according to
Young: On his first day, he asked for income, cash-flow and
balance-sheet statements and “they looked at me like I was from
Mars,” he said. In some areas, nine workers were doing jobs
normally done by two, he said.

Young said in New York it’s “naive” to think that
Jefferson County can manage its system and comply with a 1996
order to fix the system without making customers pay more.

The system needs $30 million to $35 million annually for
new pipes, he said. It spent $7 million last year. The lack of
mandatory hookups for new development exacerbates the system’s
revenue difficulties, Young said.

He said he expects to prevail in court and stay on as
receiver. He said his pay rate was set by the judge who
appointed him, and that he earns it.